‘Perverse’ System Cripples Province

Worth A Look, Equalization, Frontier Centre

Facing mounting bad news about the provincial economy, Premier Dalton McGuinty admitted yesterday that Ontario is headed for have-not status, and warned that any impending downturn will be more pronounced unless the country’s “perverse” equalization system is changed.

Mr. McGuinty also lashed out at the federal system of regional subsidies and transfers, saying Ontario should not be paying as much as it is — between $20 billion and $21 billion more than it receives — to subsidize other provinces, many of which are booming because of high commodity prices. Comparing Ontario to a slumping star hockey player, he suggested other provinces lend a hand by demanding less federal funding.

“I think Canadians need to ask themselves what do we need to do now to strengthen Ontario, because (we) keep producing 40 per cent of the national wealth. It’s in everybody’s interest that we find a way to get Ontario back on its feet and scoring goals.

“It’s one thing to send $20 billion to the rest of the country in good times, but in periods of economic challenge, this is nonsense. We can’t afford to do that.

“I love being generous, but sometimes you can’t afford to be that generous.”

On Monday, TD Bank released a report predicting Ontario’s ailing economy would achieve “have-not” status by 2010. The report’s authors believe the province would be entitled to $400 million that year and $1.3 billion the following year.

The chief factor in Ontario’s relative decline is soaring commodity prices, particularly oil and gas, according to the TD report, particularly since the complex equalization formula moved to a 10-province standard in 2007, bringing oil-rich Alberta into the fold.

Ontario is a commodity importer and counts on manufacturing for nearly one-fifth of its total economic output. The province is doubly harmed because soaring energy prices have propelled the Canadian dollar to record high levels, making its products more expensive abroad.
Mr. McGuinty praised the report as “helpful” and “fair,” but added that Ontario now faces an unusual prospect.

“We have ended up with the possibility here where … were we to become a recipient (of equalization), we would rescue ourselves with our own money. That’s how perverse and nonsensical this financial arrangement is.”

Provincial officials, however, say they expect the province wouldn’t benefit from the equalization windfall. The federal government clawed back its Canada Health Transfer on a “dollar-for-dollar” basis when B.C. became an equalization recipient, said spokesman Sean Hamilton.
Moreover, equalization is designed to rise by a fixed, 3.5-percent annual rate as a result of a 2004 deal between then-prime minister Paul Martin and the premiers. Ontario’s payments will not decrease, despite the province’s diminishing economic prospects, officials said.
It is that type of arrangement that has several prominent intellectuals backing Mr. McGuinty’s complaints.

David MacKinnon, a former senior bureaucrat, bank executive and CEO of the Ontario Hospital Association, says Ontario’s slide into “have-not” status was the inevitable result of a flawed system.
“I’ve been predicting this for 10 years, so I’m not surprised at all,” he said yesterday. “What I fear, though, is that it’s only the beginning.”

Mr. MacKinnon believes equalization and the equally valuable federal system of regional subsidies are killing Ontario’s competitiveness.

Per capita, Ontario has fewer hospital beds, fewer nurses, fewer judges and larger class sizes than anywhere else in Canada (except, in the case of class sizes, Alberta). Its contribution to Confederation, meanwhile, amounts to about four per cent of GDP, he says, roughly the same rate as U.S. defence spending.

“If we value the future of this country, we’ve got to take a different path,” Mr. MacKinnon said yesterday, suggesting scrapping the current system and instead giving provinces federal GST revenues.

Not everyone was so supportive. Provincial Conservative party leader John Tory accused Mr. McGuinty of picking up an old argument as a way of diverting attention from his government’s failure to stem bleeding in the economy.

“Mr. McGuinty finds a new diversion every week. I’m sure the weather’s coming soon — and probably the metric system.”